News

CME: What Factors are Causing Beef Market Falls?

13 October 2016

US - The recent rally in fed cattle futures proved to be short lived (as so many before it) and the nearby contract led the entire complex lower again, according to the latest Daily Livestock Report published by Steiner Consulting Group.

It is inarguable that packers at this point appear to have all the leverage. The nearby fed cattle contract has declined some 535 points in the last five trading sessions, with most of the decline happening on Monday and Tuesday.

Market participants and analysts are scratching their head a bit, confused about this new round of selling. The catalyst appears to be lower cash sales buttressed further by reports of deliveries against the October contract, all of them in Worthington. This has been a point of much discussion and we would refer you to the changes that CME put in place affecting the October 2017 contract.

But back to the discussion about seemingly burdensome supplies of market ready cattle vs. a wholesale beef market that seems to have some issues but also appears much better positioned to compete than a year ago.

What are the problems in the wholesale market that may give packers some pause as to how aggressively they need to chase cattle?

First, we would argue that beef packers clearly sense the threat that cheaper pork and chicken products present for beef features in Q4. Few people will decide replace the rib roast for Christmas with chicken breasts just because of the widening price spread. But the situation becomes more complicated for ground beef, which has fallen off a cliff once consumers put a tarp over their grills.

Also concerning is the significant slowdown in foodservice demand, with the latest Restaurant Performance Indicator reporting the index of customer traffic is now well in contraction territory and at the lowest level since 2010.

One only needs to look at the dismal performance of fat beef trimmings (50CL beef) to recognise that something is amiss with ground beef. Normally we see fat trim values improve in October and November. This year, however, the softer demand and ample daily slaughter is pushing fat beef trim towards rendering value.

There are also plenty of positives in the beef market. Exports are in good shape and the value of the comprehensive cutout now is at the premium to choice, evidence that packers are deriving more value through exports.

Packers' margins, which normally are compressed in Q4, remain excellent and rival the levels we saw last year and for much of this summer. But no one gives up their margin unless they have to. So far they have not had to.

So why have packers been able to force the hand of feedlots? After all, feedlot supplies appear to be more current than they were a year ago and the inventory of +120 day cattle is substantially lower than it was in October 2015.

Could it be that there are more cattle on feed than we think? It is hard to say without good data. It is true that each month USDA conducts a feedlot survey but that only covers those feedlots that have a capacity of over 1000 head. This represents about 80 per cent of all cattle on feed but, as the second chart shows, the supply of cattle in smaller feedlots varies depending in part (we think) on grain prices.

In January, the supply of cattle on feed was 1.2 per cent larger than the previous year while the +1000 head survey showed a 0.5 per cent decline. In other words, there were more cattle in the smaller feedlots.

USDA did not conduct a national survey in July, the second time in the last five years they have not done so, creating a gap in the data and, more importantly, in our understanding of the on feed supply picture.